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New Medicare Surtaxes

Today we will take another look at the two new Medicare surtaxes that were first effective on January 1, 2013. These were both a result of the Patient Protection and Affordable Care Act.

Beginning in 2013, individuals, trusts, and estates who have adjusted gross income in excess of certain amounts will face a surtax of 3.8 percent of net investment income. This new tax only applies to married couples filing jointly with Modified Adjusted Gross Income in excess of $250,000 or $200,000 for single taxpayers. For estates and trusts the amount is approximately $12,000.

The tax is applied to the lesser of the net investment income or the Modified Adjusted Gross Income in excess of the amounts discussed earlier. Net investment income for surtax purposes is interest, dividends, royalties, rents, gross income from a passive business activity, and net gain from disposition of property other than property held in a trade or business. Investment income is reduced by related deductions to such income to arrive at net investment income.

Here’s an example:

For a married couple filing jointly, if their Modified Adjusted Gross Income is $260,000 and that includes $20,000 of net investment income, they would have $10,000 subject to the new surtax.

A single taxpayer with a Modified Adjusted Gross Income of $300,000 with the same net investment numbers would have $20,000 subject to the new surtax. Again, this is because the tax is applied to the lesser of the net investment income ($20,000 of investment) or the Modified Adjusted Gross Income ($100,000).

The second surtax applies to wages and self employed income. Beginning in 2013, the employee portion of the Medicare tax increases from 1.45 percent to 2.35 percent on wages in excess of $20,000. That’s $250,000 for married couples filing jointly and $125,000 for married couples filing separately. The additional 0.9 percent Medicare tax is also imposed on self employed income that exceeds these thresholds.

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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